Opinion

Hot Topics:

Deficit hype is only political spectacle

By PAUL HEISE

Updated:
11/07/2012 09:06:37 AM EST

The next agenda item careening down on us is the debt, the deficit and the "fiscal cliff." This is, of course, a cooked-up issue since the debt and the deficit, despite the paid advertisers you hear, are not a problem. Actually, the fiscal cliff is a politically contrived crisis that can and should be kicked down the road.

As the law now stands, if the lame-duck Congress does not act by Jan. 1, legally mandated tax increases and spending cuts will, in the next fiscal year, take $560 billion of aggregate demand out of the economy. The nonpartisan Congressional Budget Office says that going off this fiscal cliff will automatically start a recession with a 4 percent decrease in real GDP.

Both parties are threatening us with this fiscal cliff, but it is a contrivance to manipulate us. As President Barack Obama said in the last debate, and no one confronted him, it "will not happen."

The politically dominant Washington consensus asserts that the $16 trillion debt and $1.5 trillion deficits are an immoral imposition on future generations and must, starting now, be paid down to avoid American default, bankruptcy and a world economic crisis. Put that way, responsible citizens want to do something.

Three options are worth our attention: first, our leaders are offering us European-type "austerity." To avoid a Greek tragedy, they would deliberately push the economy into recession with increased taxes and decreased entitlement spending.

Advertisement

The second option, proposed by a small minority, would ignore the debt and the deficit for the short run to fight the recession and then stimulate the economy, expecting that in the long run we can grow out of the debt.

Third, we could just push back the date for all of this and, in effect, delay action indefinitely.

All the big money is pushing option one, so it is the favorite. The deficit hawks, the neoliberals and the corporate fear lobby have sold the people and Washington on the idea that America is broke, that we borrowed and consumed far beyond our means, and now we must pay for that wickedness. Austerity is the way they would punish us for our excesses. This scolding is "gross self-interest masquerading as public statesmanship."

Option two, the Keynesian fiscal stimulus, was the choice for one brief moment in the midst of the crisis. At that time both Obama and former President George W. Bush were ready to spend any amount that was necessary to prevent another Great Depression.

Now, however, the Keynesian stimulus has few followers, which is strange since the numbers say it is the most promising choice. The short-term deficits are clearly and directly attributable to the bursting financial bubble. The longer-term deficits are directly attributable to increasing health-care costs. Control those costs, and you control the long-term deficit.

It looks like the choice we are really being offered is austerity or bankruptcy. First, let's get rid of the threat of bankruptcy or default. No matter how much money billionaire Pete Peterson and his Institute for International Economics spends ($500 million) telling you differently, bankruptcy is impossible. As Forbes magazine says: "it is impossible for the U.S. to default."

And Alan Greenspan, former chairman of the Federal Reserve, explains why: "United States can pay any debt it has because we can always print money to do that. So there is zero probability of default."

Austerity implies we are actually broke. We are not. We are still the richest country in the world; we can print our own money and meet any need.

The U.S. Treasury and Federal Reserve System can and do create and destroy money as part of their responsibility to manage interest rates and economic growth. In effect, the Federal Reserve creates the money it "lends" to the Treasury. Treasury in turn gives IOUs, called treasury bonds, to the Fed.

The Federal Reserve now holds $5 trillion worth of those bonds, one third of our whole debt. The government has written those IOUs to itself, and it can shred or burn them with no economic or political consequences.

The only danger is that we would do something really dumb. If, for instance, the Federal Reserve should attempt to sell those bonds to the public - or if the Chinese were to try to cash in their trillions of dollars in treasury bonds - this would starve the American and international economy of money and bring on the mother of all depressions, something neither the Fed nor China would want.

Repeat after me: "The debt and deficit are not a problem." And keep saying that during the coming political squabbling. The fiscal cliff is political theater that no one should be using to scare people into voting for them. The fiscal cliff is a fraud. Now that the election is over we can bring down the curtain and roll through the discredits.

As for the whole debt and deficit, just kick the can down the road! That's all this threat is worth.

A resident of Mt. Gretna, Heise holds a Ph.D. in economics and is professor emeritus of economics at Lebanon Valley College. His column appears every other Thursday. He maintains past columns and can be reached through his blog, paulheise.blogspot.com.